The Hartford 2008 Annual Report Download - page 36

Table of Contents
Life Reserves
Life insurance subsidiaries of the Company establish and carry as liabilities, predominantly, five types of reserves: (1) a
liability equal to the balance that accrues to the benefit of the policyholder as of the financial statement date, otherwise
known as the account value, (2) a liability for unpaid losses, including those that have been incurred but not yet reported,
(3) a liability for future policy benefits, representing the present value of future benefits to be paid to or on behalf of
policyholders less the present value of future net premiums; (4) fair value reserves for living benefits embedded derivative
guarantees; and (5) death and living benefit reserves which are computed based on a percentage of revenues less actual
claim costs. The liabilities for unpaid losses and future policy benefits are calculated based on actuarially recognized
methods using morbidity and mortality tables, which are modified to reflect Life’s actual experience when appropriate.
Liabilities for unpaid losses include estimates of amounts to fully settle known reported claims as well as claims related to
insured events that the Company estimates have been incurred but have not yet been reported. Future policy benefit reserves
are computed at amounts that, with additions from estimated net premiums to be received and with interest on such reserves
compounded annually at certain assumed rates, are expected to be sufficient to meet Life’s policy obligations at their
maturities or in the event of an insured’s disability or death. Other insurance liabilities include those for unearned premiums
and benefits in excess of account value. Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves. Liabilities for death and living benefit guarantees whose values are dependant upon the equity
markets, have significantly increased in 2008 as equity markets declined.
Property & Casualty Reserves
The Hartford establishes property and casualty reserves to provide for the estimated costs of paying claims under insurance
policies written by The Hartford. These reserves include estimates for both claims that have been reported to The Hartford
and those that have been incurred but not reported (“IBNR”) and include estimates of all expenses associated with
processing and settling these claims. This estimation process involves a variety of actuarial techniques and is primarily
based on historical experience and consideration of current trends. Examples of current trends include increases in medical
cost inflation rates, the changing use of medical care procedures, the introduction of new products such as the Dimensions
product in Personal Lines and the Next Generation auto product in Personal Lines, Small Commercial and Middle Market.
Other current trends include changes in internal claim practices, changes in the legislative and regulatory environment for
workers’ compensation claims and evolving exposures to claims asserted against religious institutions and other
organizations relating to molestation or abuse and other mass torts.
The Hartford continues to receive claims that assert damages from asbestos-related and environmental-related exposures.
Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution-related clean-up costs. As discussed further in the
Critical Accounting Estimates and Other Operations sections of the MD&A, significant uncertainty limits the Company’s
ability to estimate the ultimate reserves necessary for unpaid losses and related expenses with regard to environmental and
particularly asbestos claims.
Most of the Company’s property and casualty reserves are not discounted. However, the Company has discounted liabilities
funded through structured settlements and has discounted certain reserves for indemnity payments due to permanently
disabled claimants under workers’ compensation policies. Structured settlements are agreements that provide fixed periodic
payments to claimants and include annuities purchased to fund unpaid losses for permanently disabled claimants and, prior
to 2008, agreements that funded loss run-offs for unrelated parties. Most of the annuities have been purchased from Life and
these structured settlements are recorded at present value as annuity obligations of Life, either within the reserve for future
policy benefits if the annuity benefits are life-contingent or within other policyholder funds and benefits payable if the
annuity benefits are not life-contingent. If not funded through an annuity, reserves for certain indemnity payments due to
permanently disabled claimants under workers’ compensation policies are recorded as property and casualty reserves and
were discounted to present value at an average interest rate of 5.4% in 2008 and 5.5% in 2007. Reserves for structured
settlements that funded loss run-offs for unrelated parties were discounted at an average interest rate of 5.5% in 2007.
As of December 31, 2008 and 2007, property and casualty reserves were discounted by a total of $488 and $568,
respectively. The current accident year benefit from discounting property and casualty reserves was $38 in 2008, $46 in
2007 and $63 in 2006. Contributing to the decrease in the current accident year benefit from discounting over the past three
years has been a reduction in the discount rate, reflecting a lower risk-free rate of return over that period. Accretion of
discounts for prior accident years totaled $26 in 2008, $31 in 2007, and $32 in 2006. For annuities issued by Life to fund
certain P&C workers’ compensation indemnity payments where the claimant has not released the P&C Company of its
obligation, Life has recorded annuity obligations totaling $945 as of December 31, 2008 and $962 as of December 31, 2007.
As of December 31, 2008, net property and casualty reserves for losses and loss adjustment expenses reported under
accounting principles generally accepted in the United States of America (“U.S. GAAP”) were approximately equal to net
reserves reported on a statutory basis. Under U.S. GAAP, liabilities for unpaid losses for permanently disabled workers’
compensation claimants are discounted at rates that are no higher than risk-free interest rates and which generally exceed the
statutory discount rates set by regulators, such that workers’ compensation reserves for statutory reporting are higher than
the reserves for U.S. GAAP reporting. Largely offsetting the effect of the difference in discounting is that a portion of the
Source: HARTFORD FINANCIAL S, 10-K, February 12, 2009